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A Negative Effect of Cost‐Reducing Public Investment: The Role of Firms’ Entry

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We investigate public infrastructure investment that reduces production costs in oligopoly markets. The government decides on its public investment based on conventional cost–benefit analysis that considers the direct effect (the benefit estimated as a reduction in production costs). If the entry barriers are significant, this estimation is conservative because the positive indirect effect of the subsequent production expansion is ignored. In free‐entry markets, by contrast, the indirect effect can be negative depending on the demand and cost functions. Thus, conventional cost–benefit analysis is conservative in the presence of entry barriers, buy may be too optimistic without entry barriers.
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Document Type: Research Article

Publication date: March 1, 2019

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